2006 brings tax changes; review before spending, saving

The code also provides, in some cases, for siphoning slightly more of what you earn as your income increases with inflation. But these cases are far less numerous.

Therefore, as you make spending and savings plans for 2006, it should be helpful to note of significant federal income tax changes that became effective on Jan. 1:

• Tax rates: For married couples filing jointly and surviving spouses, for example, the 25 percent marginal tax rate applies to those with taxable income of $61,301 to $123,700, instead of $59,401 to $119,950, after adjustment for inflation.

For single taxpayers, the 25 percent bracket was increased to taxable income of $30,651 to $74,200, from $29,701 to $71,950. Similar changes were made for lower and higher tax brackets, and for married individuals filing separately, heads of household, and trusts and estates. (See IRS Form 1040 booklet and the Internal Revenue Service’s Web site, www.irs.gov.)

• Social Security and Medicare: The Social Security tax rate for employers and employees was maintained at 6.2 percent, but the maximum amount of salaries and wages subject to the tax was raised from $90,000 to $94,200.

The maximum earnings for beneficiary under full retirement age were increased from $12,000 to $12,480 annually. The additional Medicare hospital tax on both employers and employees of 1.45 percent also was unchanged, but monthly Medicare Part B premiums increased from $78.20 to $88.50.

• Standard deduction: The standard deduction for married taxpayers who do not itemize deductions and who file jointly, as well as for qualifying widows and widowers, was increased from $10,000 to $10,300 for single taxpayers, and married taxpayers filing separately from $5,000 to $5,150, and for heads of household from $7,300 to $7,550.

• Deductions for use of car: Standard rates per mile in deductions for the use of a car for business purposes were changed from 40.5 cents to 44.5 cents in 2005’s first eight months and to 48.5 cents in the last four months. The rate for use of a car for charitable purposes was held at 14 cents per mile except for taxpayers using a vehicle only in connection with aid to Hurricane Katrina victims. For those taxpayers, the deduction is 70 percent of the business mileage rate in effect on the date of the contribution.

• Long-term care insurance deductions: Limits on annual deductions for premiums for eligible long-term care insurance policies were raised across the board. For those older than 70, the amount increased from $3,400 to $3,530; for those 61 to 70, it increased from $2,720 to $2,830.

• Exemptions: The amount that may be deducted for each exemption was increased from $3,200 to $3,300, as were the levels of adjusted gross income at which exemptions begin phasing out, from $218,950 to $225,750.

• Retirement plan contributions: Just when slippage in average annual returns on stock and bond investments underscores the importance of having more money at work for a retirement nest egg, the annual limit on contributions to IRS-qualified retirement plans has gone up again, making building that nest egg easier.

Under salary-reduction agreements permitting deferral of income taxes for contributions to 401(k)s, 403(b)s, and several other retirement plans, participants may now contribute $15,000 instead of $14,000, some or all of which may be matched by employers.

The limit on additional “catch-up” contributions to 401(k), 403(b) and 457(b) plans by individuals of 50 or older was raised from $4,000 to $5,000, with a resulting higher limit of $20,000 on total contributions.

The 2006 limit on contributions to traditional and Roth IRAs is $4,000, the same as 2005; but the “catch-up” limit was increased from $500 to $1,000.

• Gift tax: The annual exclusion from gift tax was increased from $11,000 to $12,000 per person.

• Estate tax: The exclusion from federal estate tax of estates’ market values was raised from $1.5 million for people dying in 2005 to $2 million for people dying in 2006, and the maximum tax rate for taxable estates was reduced from 47 percent to 46 percent.

Troy E. Kennedy is senior vice president & shareholder with Springfield Trust Co.. He can be reached at tkennedy@springfieldtrust.com.[[In-content Ad]]